Former CEO Gary Friedman will continue to be involved with Restoration Hardware in an advisory role.

Upscale retailer Restoration Hardware has ousted Gary Friedman, its chairman, co-CEO and biggest shareholder, amid reports that he engaged in an inappropriate relationship with a much younger female employee.

Friedman, 54, who has been CEO since joining the company in 2001, will instead become the chairman and CEO of Hierarchy, a new spin-off company that will develop new lines of complementary business "including apparel, accessories, footwear and jewelry," the company said in a news release.

The reorganization, announced late Tuesday, got little attention until Friday when The New York Times reported that Friedman's departure came after an internal inquiry into his "intimate" relationship with a 26-year-old subordinate, who has since left the company.

The Times, citing "people involved in the matter," reported that the reorganization came after the board was altered to the relationship by a former boyfriend of the young woman and asked the law firm of Weil, Gotshal & Manges to initiate an investigation, and confronted Friedman about its findings this month. The details of the investigation have not been made public, but the Times reported that the woman said her relationship with Friedman, who is divorced, was consensual and remains ongoing.

The company did not respond to a request for comment from NBC News.

Carlos Alberini, who joined restoration in 2010 and served as co-CEO, has been promoted to CEO, and J. Michael Chu has been named chairman of the board. Chu is a managing partner of Catterton Partners, the private equity firm that owns Restoration Hardware.

Friedman is hardly the only CEO to fall from grace amid reports of an inappropriate relationships: The top executives of Best Buy and Hewlett-Packard both were forced out in similar circumstances. One difference in this case is that Friedman, the largest individual shareholder of Restoration Hardware, will remain at least tangentially involved in the company.

Friedman has been a highly visible promoter of the company's faux vintage furniture and housewares, appearing in ruggedly casual apparel in the company's catalogs and other platforms, including the main page of its website.

The bombshell was dropped at a particularly inopportune time for the company, which is seeking to go public. Francis Gaskins, president of IPO Premium, said that even if the board intended to oust Friedman as a form of damage control, negative effects remain.

"Anytime there’s a top level management change, investors become skittish," he said. "If they do the IPO i think it’s going to affect their market cap... because of the uncertainty." Investors might also question the board's oversight capability.

But Gaskins acknowledged that keeping Friedman at the helm wasn't an option, either. "The real problem with that is his leadership is torpedoed," he said. "It ruins his credibility and he can’t lead anymore.

“Companies really need to have a zero-tolerance policy today,” said John Challenger, CEO of executive search firm Challenger Gray and Christmas. “This is a part of expectations today of work environments, that relationships between superiors and subordinates are not allowed.”

Restoration Hardware’s board probably was worried about the prospect of a sexual harassment lawsuit if the relationship soured, Challenger said. Also, if the relationship became common knowledge within the company, employee morale would suffer based on the assumption that the subordinate was getting special perks or access unrelated to merit.